YTL Power International - Finally confirms 1Bestarinet project HOLD

- We maintain our HOLD call on YTL Power International Bhd (YTLP) with a fair value of RM2.05/share based on a 15% discount to our sum-of-parts (SOP) value of RM2.42/share.

- The Edge Financial Daily reported that YTLP’s managing director Tan Sri Francis Yeoh as finally confirming that 60%-owned YTL Communications Sdn Bhd has secured the RM1.5bil 1Bestarinet project, which is to be implemented over 5 years. This project, which started early this year, involves providing cloud-based virtual learning environment (VLE) platform and high-speed Internet connectivity to 9,924 schools nationwide, which will be provided with equipment and 4G dongles. The tenure could be extended to 15 years and could involve the management of the VLE.

- This development is not a surprise as the media has speculated on the award. Also, it has been highlighted on YTL Communication’s website. But until now, management has not commented much on the project. We understand that the group will be tapping onto its Yes 4G WiMax network to provide the 1Bestarinet service. Hence, the capital expenditure for this project will be included in YTLP’s construction of 4,000 base stations in Peninsular Malaysia. The capital expenditure spent will essentially be accounted as an asset to YTLP with revenue recognition upon the provision of the wireless services.

- While 1Bestarinet will expand Yes’ 4G subscriber base and help to drive the growth of average revenue per user, we expect this division to continue to suffer losses over the next few years. Assuming that Yes’ capital expenditures reach RM2.5bil next year (which potentially involve 5,000 base stations throughout Malaysia), we understand that the WiMax service would require a subscriber base of at least 1 million (vs almost 500,000 currently) to break even or stage a turnaround to profitability. Hence, we maintain FY12FFY14F loss assumptions of RM100mil-RM250mil for now.

- We also remain concerned about: 1) the replacement of the group’s 1,212MW gas-fired power plants in Paka and Pasir Gudang, upon expiry of their power purchase agreement with Tenaga Nasional in September 2015, and 2) the group’s proposed investment in a 30% stake in an Estonian state oil company-led oil shale project in Jordan, which could cost up to US$5bil. The stock currently trades at a fair CY12F PE of 10x – within its three-year diluted PE band of 10x-16x.

Source: AmeSecurities